Clear Eyed Capitalist

Money to the People!

I aspire to get back onto regular writing, so much comes by my mailbox these days it’s hard to keep up, not to mention the stack of books I’d like to be reading. I’ve been gifted with a copy of Piketty’s Capital, but I’m quite excited about reporting back on a much less well known book that I think will yield great insights for impact investing. So stay tuned! More and more my focus is on finance closer to the grassroots and there’s great stuff going on.

First and foremost is the company where I’m privileged to spend two days a week: Community Sourced Capital. My shorthand is “crowdfunding like kickstarter, but loans instead of donations”. One of my favorite taglines from co-founder Casey Dilloway is “a community-based line of credit”. Net: you, dear reader, as a non-accredited investor, can purchase an interest-free “square”, essentially contributing $50-$250 of your capital to support a local business. Once enough squares are aggregated to cover the loan, the loan is made and the business makes repayments based on their revenue. Instead of interest, they pay a monthly fee while the loan is outstanding. Principal repayments go back into my “squareholder” account, and every month I get a chance to roll re-accumulated capital into a new small local business! I’ve lent to a local small grocer, a vegan deli, a cupcake shop who wanted to purchase a refrigerated trailer for going to summer festivals, I helped Washington State’s first organic cranberry farm buy a juicing machine, and this month I rolled some of that repaid capital into a loan to a ceramicist who makes sauerkraut crocks! (You have until noon July 28th to join in! Now I just need to go to the Columbia City farmers market to buy one for myself 🙂 In less than a year, I’ve directly invested $1600, and I’ve already had $2100 of impact by re-investing $500 of already-repaid capital!

Able is another startup focused on using social capital to de-risk the small business capital space. Their term of art is “collaborative underwriting”. Their borrowers aggregate 25% of the target loan from 3-5 personal backers and then Able loans the rest. One thing I’m curious about in a model like Able is: where’s the risk? I notice they say that those backers are providing “the first 25%” of the loan – that ‘first’ is a key word. Another key vocabulary word that catches my attention is “underwriting”. That suggests to me that those personal backers are bearing most of the risk of the loan – that if there’s any under-repayment, the personal backers will lose all their money before Able loses any. It’s common in banking to de-risk a loan by stacking capital: a 10-20% down payment makes sure the borrower already has skin in the game; then a co-signer; then a “first-loss cushion” – basically a layer of capital that will eat losses before the commercial lender suffers any. 20% is a number I see commonly, so a 25% first-loss cushion seems pretty, well, cushy to me.

It’s interesting to me that in their blog they reference other “sharing economy” startups because just yesterday Kamal Patel of UbrLocal was talking to me about how folks are starting to wake up to the fact that the “sharing” economy is really just Peer-to-Peer (P2P) old-fashioned capitalism and isn’t actually about sharing at all. I would say on my shallow read, Abel strikes me as a killer investment opportunity cloaked in social impact language. Given they’ve got at least $5M in investor capital to generate a return on, it’s hard to see how they could be other.